Oriola Oyj

Good morning, everyone, and a warm welcome to Oriola's Q3 results webcast. My name is Tuo Stenius-Ornielm, and I'm from Oriola's Investor Relations. With me today, I have CEO Katariina Gabrielsson and our new CFO Mats Danielsson. After the presentations we open up for the Q&A and we ask you to send in your questions through the chat already during the presentation. Also as a reminder in the Q&A we will focus on the questions about Oreola's business and financial performance. The webcast will be recorded and the recording will be available on our website later today. Without further ado, let's go to the disclaimer. So here it is. And now, Katariina, please go ahead.

Thank you, Toa, and warmly welcome also on my behalf. This is the agenda for today. It's quite traditional. We will start with the highlights and operating environment, the segments, and then you will meet Mats for the first time in these sessions for the financial review before we go to the Q&A. We then start with how the quarter three has been going. Overall, I'm really happy to announce that we have improved the profitability compared to a year ago. The net sales was 424 million euros, which is up 19%. If you look at organic growth, it's 5%. And that's due to a change from the consignment stock to inventory stock in one of the pharmaceutical companies. The adjusted EBIT was 5.5 million euros and that's a growth of 25% and adjusted EBIT excluding the DOS Sweden was 5.4 million euros. The net sales growth was driven by the distribution segment and that is also the reason why the profitability has improved. So the net sales growth and the lower freight cost is the reason for the improvement of profitability, the main reason. The refined strategy was launched one year ago. We announced it then in the webcast a year ago. And we can see a steady progress towards the goals in the strategy. I will also tell here that even though we have seen changes in the management team during the third quarter, the management team is fully committed to the strategy and the long-term goals that we have in the company. A really important part in the refined strategy is the ERP project and that is proceeding according to plan. We have in the quarter renewed and harmonized the processes and we are in the end phase now of finalizing this phase of the project and then of course starting the build process. In the joint venture company Kronans Apotek we can see that e-commerce sales was growing by double digits and that's improving the e-commerce footprint in Sweden. In Sweden this is really important since we know that the e-commerce segment is really large in Sweden. It's around 25% of the total pharmacy market. In the pharmacies, we can see that the volumes was more flat and that has resulted in flat sales compared to a year ago. Then going to operating environment. The overall operating environment has stabilized. We can see that the consumer confidence in Sweden is on a more normal level than in Finland, where it's a little bit weaker. The cost inflation, which is affecting Oreola mainly on the energy and fuel prices, has been slowing down and has been more normalized now during the quarter. We can also see that this is most likely what will happen in the quarter four. The challenges in the availability of pharmaceuticals continue in both Sweden and Finland, as well as in Europe. And this is also something that we predict will continue for the ongoing quarter. The pharmaceutical distribution market is continuing with a steady growth, and that is driven mainly by a good demand in high-value pharmaceuticals. This is a trend that we have seen, and we can also in this case see that this is something that will ongoing for the future. Then going to our segments, let's start with the distribution segments. In Finland, we can see a stable market share, but a small decline in Sweden. The net sales was growing by 23% in this segment to 351 million euros, and that is a 23% growth. Like I said before, this is because we have a customer shifting down from consignment stock to inventory stock. And that means that organic growth was 5%. We have higher market volumes and also price increases that is done supporting the organic growth. The profitability improved in this segment by 46%, with adjusted EBIT reaching 5 million euros compared to 3.5 million euros a year ago. And like I've already stated, mainly depending on net sales growth and also lower cost year on year. I'm really pleased to see that we're also now building for the future in this segment. During the quarter, we have signed new and also renewed existing distribution agreements, and that will be visible also for the future quarters to come. And since we have in the strategy that we will work more cross-market, I'm also really pleased to see that we, during the quarter, have signed a cross-market customer with volumes that will start during quarter one in 2025. In Sweden we have entered a new sales channel and that's the optician channel. And that gives also the opportunities for the wholesale segment. Since we have quite many products in the wholesale segment, that is then also a possibility to sell in this new channel. Then going to the wholesale segment. Wholesale segment is then consisting of the traded goods, the OTC products, the parallel import and the specialised medicines, as well as the advisory services that we then have in Aureola's portfolio. The long-term strategic goal is to grow the wholesale business in this segment. The net sales was flat at 74 million euros and the profitability was also on last year's level. We can see that the Finnish wholesale business was stable, but the volume in Sweden was declining. We are in this segment now building for the future and also in this segment I can see that we have added new products and suppliers in the portfolio that is then something that we will build on for the future. We will also gain new listings and that means then that we have new products coming into the customer portfolio and also introduce new products in the Finnish market. In Sweden I'm really pleased to see that the Dexel brand has now been introduced And that's the first time that we can see that we are taking some products from Finland and introducing them to Sweden. And that is then one part really important for the strategy growth in this segment. A year ago, we also announced that we should sell all shares in Svensk DOS AB to Apotex Tjänstsväg AB. We signed that contract in October 2023. I think all of you also remember that during the spring, we were also announcing that the Swedish Competition Authority have announced that the sales to Apotex Tjänstsväg AB was prohibited due to negative effects of the competition in the market. It has also been announced that the protection Sverige AB has appealed this decision and during the autumn there has been a process ongoing and we are waiting for the outcome of this process in November. And this means that we will come back to this of course when we know more of the outcome. I will also tell you here now that there is one more instance that you can appeal to so it might be so that will take a little bit longer before we have really finalized this process. Aureola is still committed to sell this business, Top Protections AB, but we are at the same time also, of course, considering other options if we get a negative verdict from the appeals. But we will exit the Swedish dose dispensing business because we still see that a tender market structure and dynamics in Sweden hasn't changed. With this, I will then turn over to Mats and the financial viewers. Welcome, Mats.

Thank you, Katariina, and also from my side, good morning and welcome to this presentation. My name is Mats Danielsson, started at Oriola in mid-September, have a background in finance, worked in different companies, different industries, and as a CFO of Oriola, I will support and drive the strategic agenda that has been set and communicated already a year ago. But let's move to the quarter three. If we look at net sales, we had an organic growth of 5%. If we look at the growth in the distribution segment, we see a significant increase. And that's, like Katarina also mentioned, it's mostly due to the fact that there is a customer has moved from consignment stock to inventory. If we look at wholesale, the development is flat. We have some small decline in volumes in Sweden compensated then by other areas. So the total development is flat and the total net sales increase is 19%. Looking at the adjusted EBIT going from 4.4 million to 5.5, we have the biggest increase in distribution of 1.6 million, of which 0.8 is actually the increase of Svensk DOS, and the rest is related to lower cost, freight cost and other costs, and also increase in volume. Wholesale is flat and a 25% increase in adjusted EBIT. Looking at the year-to-date numbers, invoicing increased 6%, net sales again have to take into account the move from consignment to inventory, 12% increase, and then the adjusted EBIT year-to-date is increasing from 11.3 last year to 15.3. Of this 4 million increase, the profitability is improving. We have lowered the cost and kept it on a level where we are not making a loss. So that's the big change. Then the other two million is mostly related to lower cost, increased volume. Now also good to mention the adjusted items that we are calculating. We have, during the autumn, we have analyzed the appropriate accounting treatment of the ERP project, and it's a cloud arrangement, and now we have decided that the cost will be book tax expenses. Mostly, we are estimating that out of the 35 million that we have estimated the total project to be, that around 90% will be expenses in adjusted items and 10% will be capitalized. We have now also, due to the fact that we have changed the principles, we have from last year, 1.9 million has been through impairment then as a cost in the quarter three of the ERP, the investment, the adjusted items in the footnote also 4.4 million. So out of that, 1.9 is actually related to to last year. Looking at the distribution segments, share of net sales is 81%, share of adjusted EBIT is 64%. If we look at the adjusted EBIT here, we have the 2 million year-to-date of svensk dos. otherwise lower freight cost and other cost and volume affecting. And we have an EBIT margin, adjusted EBIT margin of 1.3 in the distribution segment. Looking at the wholesale segment, good to note that the share of net sales is 19%. The share of adjusted EBIT is 36%. If we look at the net sale, it was flat in the third quarter, but it's good to note that we have done a lot of activities. In Finland, there has been new listings, new products, and in Finland there's a quite stable underlying volume In Sweden, we have introduced Dexal, a small decline in volumes, which have affected also the net sales growth in total year to date, and also has an impact on the adjusted EBIT, if you look at the year to date figures of still going from 7.1 to 7.5 million. And good to note also that we have an adjusted EBIT margin of 3.2% in the wholesale segment. Then we go to the net profit. There was an improvement in the net profit. Last year we had impairment right down of Sweden, which impacted of course the EBIT. We have Now the financial income and expenses, the boxes are very different sizes, the number is quite the same, but we have repaid debt, but that is not really seen in the numbers yet, but that will come because it has been done. The phasing will show that there is an opportunity to reduce that a bit. but at the same level as last year, then we have a bigger loss in the joint venture affecting our net profit compared to last year, so minus 2.3 this year, 17.9 last year. Looking at the cash flow, here we also see that we have a slightly improved effect from working capital this year compared to last year. We have repaid debt of 39 million this year, which has affected of course the cash flow. We have paid a bit more dividends than last year and we are ending up at 83.9 million cash and we have an operative cash flow that is slightly positive. Looking at the net debt still on a low level, we have repaid during the last 12 months, we have repaid 51.9 million of debt. and having a cash balance at 83.9 million currently, we consider that a quite good level, taking into consideration the fluctuations in the working capital that we have. Financial position, no big changes on gearing and equity ratio during the quarter. Kronan Sapoteek has had a difficult year. The third quarter has been a bit better. If you look at the adjusted EBIT, it has been positive. Kronan Sapoteek is a very important strategic partner for us. And Kronan Sapoteek expects to reach the synergies of the 25 million said earlier. But the integration process has been more complex than expected, especially related to the ERP integration, and that will therefore take a longer time than anticipated originally. We are keeping the outlook and expect the adjusted EBIT to increase from the adjusted EBIT for 2023. That was 19.5 million. Thank you.

Then looking at the key takeaways that we would then want you to remember from this presentation, you can say that I'm really happy to see that we have improved the profitability in this quarter. We have also solid performance then year over year and year to date, sorry. And we are also then keeping the guidance. I also really want to now make sure for all of you that we are like in the management team really committed to deliver the strategy and that we then announced a year ago and we are like progressing towards the long-term goals that we have with the full commitment even though there has been changes in the management team so this is the key takeaways and with that I will say that we then go to the questions

Great. So thank you, Katariina and Mats, for your presentations. We have a few questions on the chat. Let's start with those. And just a reminder to everyone that please keep on sending the questions through the chat. And also that we will focus on the questions about Oriola's business and financial development and questions relating to Kruunan Sapoteek. answer, but only within a limited scope. So the first question that we have is relating, or there's a couple of questions relating to the ERP. So I think Mats, these questions will come to you. So why were the ERP related costs so high compared to Q2? And should we expect similar level going forward?

As mentioned there was in the quarter three there was 1.9 million that was actually an effect of last year's that was booked as an investment or capital expenditure last year that we now booked as a cost according to the new principles how we are going to book the ERP cost.

Okay, and then really following up on this one, I think you mentioned this already during the presentation, but I think it's good to repeat it. So you have earlier reported that one third of total ERP costs will be handled in P&L and rest in balance sheet. Is this still valid?

Now we have analysed the agreements that we have and we have discussed and analysed and we have concluded that it's a cloud arrangement and therefore we need to book all those costs not as capital expenditure but as expenses and there will be a small part of about 10% that we will be able to book as capital expenditure, mostly related to on-premise applications that we will build on the ERP.

Good, thanks. And then there's a question relating to the dividend. So, Oriola has previously said that about two-thirds of net profit will be paid as dividend. What is the net profit from which this ratio is calculated due to Oriola's reporting many net profit figures?

That's a good question. And I don't remember exactly right now, but let's come back with that one and answer it in a proper way so we don't say the wrong, because I agree there is a lot of different figures. And let's make also for the future easier for everyone to understand how we calculate the things.

Thank you. And then there is a question on the Kronan's Apotheek synergies. So on Kronan's, does your comment mean that full synergies will be realized later than the earlier communicated and 25?

Overall, you can say that we are still saying that we have 25 million euros done in synergies expected by end of 2025. We are, though, some delayed in the implementation overall with Kronans, but we haven't said something else in this case than end of 2025.

OK, good. Thank you. And then a couple of more questions. So why didn't the good sales growth show in your profitability or market share?

You and me?

Yeah, the sales is partly or a significant part of that is related to the change from consignment stock to inventories. Such a change has quite many implications because it's a kind of new contract and so you cannot directly say that the change like this would impact the profitability in a certain way. There's balance sheet effects and there's income statement effects out of changing the arrangement.

Okay, thank you. And then following up on the market share in Sweden. So you say that it dropped a little bit. So why is that?

Overall, you can say that there is changes in the market share, like we said here. There is especially some segments in Sweden that is growing. One of them is weight loss segment. And Aureola doesn't have this kind of portfolio in Sweden. And that means that, of course, when that is growing, we are dropping a little bit.

OK, thank you. And then let's take last questions about the guidance. What is your confidence level in reaching that in Q4?

Overall, you can say that we know, of course, quite much now what will happen in Q4. Like I said also that when we look at the freight cost, we look at the energy cost, the cost inflations and all these kind of things, we can see that it's going in a better level. So with that said, we also can see that over the years, the Q4 is the strongest quarter for us. I can also add on to this one that December is maybe like the month that we can see as maybe what will happen if I say it like that because December this year has only 17 working days and that's like less than we have had like previous year and also before so that can be some warning but we are so far in the quarter now so I'm quite confident to say that the guidance should be there if something not like you know really bad happens.

Okay, great. So there are no more questions at this point. And so we can end the webcast for today. And if there's anything that you want to follow up on later on, please don't hesitate to reach out to us. But otherwise, I would like to thank everyone for joining us today and remind that the next webcast that we have will be on 4th of March, a bit later than we have had before. And that's when we will come out with the full year results. So thank you and have a good rest of the day.

Thank you. Thank you.